While purchasing your first property is usually an exciting milestone, it should also involve careful financial preparation. To ensure you are ready, the following tips should stand you in good stead if you follow them:
Get Your Credit Squeaky Clean
Your credit report and score play a huge part in getting approval for the best mortgage deals. Request your full credit reports from the three principal agencies: Experian, Equifax, and TransUnion. Scrutinize them closely for any errors and dispute any mistakes you find.
Lenders want to see a solid history of making payments on time across all your credit accounts and bills. Keep credit card balances low and avoid opening or closing too many accounts at once as this can ding your score. As a general rule of thumb, a credit score over 700 puts you in a strong position for approval.
Know Your Incomings and Outgoings
Before starting your home search, get an accurate picture of your monthly finances. Calculate your total household income after tax and other deductions like pension contributions. Track all your regular expenditures. Think rent/mortgage, utilities, transport, food, debt repayments, subscriptions, etc.
Lenders typically want your future mortgage costs, including fees, to be no more than around 35% of your gross monthly income. Also be sure to factor in council tax, building insurance, potential maintenance costs, and moving fees when budgeting.
Save a Solid Deposit
Having a larger deposit shows the lender you are a responsible borrower less likely to default. While some lenders allow as little as a 5% deposit, aim for 10-20% of the purchase price if possible. The bigger your deposit, the lower your mortgage amount and monthly payments.
Start saving early by cutting unnecessary expenses and bulking up your deposit fund monthly. Look for ways to earn extra income too. As you know by now, the more you can put down upfront, the better rates and mortgage options you’ll have.
Get Mortgage Ready
A few months before officially applying, get a mortgage in principle (also called an agreement in principle or decision in principle). This is a statement from a lender estimating the size of mortgage you may qualify for based on your income, outgoings, and credit profile.
Having a mortgage in principle shows sellers and estate agents you are a serious buyer able to borrow a certain amount. Just keep in mind it is not a full mortgage approval; that comes once you have had an offer accepted on a property.
Understand Mortgage Types
There are various mortgage options, each with their own pros and cons:
- Fixed-rate mortgage: Interest rate stays the same for an initial period (e.g. 2, 3 or 5 years), making it easier to budget, but you won’t benefit if rates drop.
- Variable-rate mortgage: The interest rate fluctuates based on the market, so payments could rise or fall over time.
- Interest-only: You only pay the interest charges monthly, with the full mortgage amount repaid in one lump sum at the end. These are harder to get approved for.
Consider your financial situation, appetite for risk, and whether you plan to stay long term when weighing up which mortgage type suits you best.
Budget for Upfront Costs
Saving for a deposit is just the start; there are several upfront fees and taxes to cover too:
- Mortgage arrangement/booking fees.
- Property valuation and survey costs.
- Conveyancing/legal fees.
- Stamp duty tax (payable on properties over £250,000).
- Moving van hire and other relocation expenses.
Budget around 3-4% of the purchase price to cover these upfront costs on top of your deposit savings.
Explore Government Schemes
If you’re struggling to save a deposit, there are government-backed initiatives that can give first-time buyers a helpful boost:
- Help to Buy equity loans allow you to borrow up to 20% of the home’s value interest-free for 5 years, so you only need a 5% deposit.
- Lifetime ISAs provide a 25% bonus on anything you save into them to use as a deposit.
- Shared Ownership lets you buy between 25%-75% of the property initially while paying rent on the remaining share.
- Right to Buy gives eligible council housing tenants discounts on buying their rental homes.
Protect Your Purchase
Once you’ve landed your dream home, there are a few more costs to budget for:
- Mortgage protection insurance: This covers your mortgage payments if you cannot work because of illness, disability, or redundancy.
- Life insurance: Ensures your outstanding mortgage gets paid off if you pass away so your family can remain in the home.
- Buildings and contents insurance: Required by lenders to protect your home and belongings against damage, theft, and other risks.
Factor these monthly or annual policy premiums into your ongoing costs. A good mortgage broker can guide you on the right protection policies for your needs.
Set a Realistic Purchase Budget
It’s easy to get carried away house hunting and fixate on properties beyond what you can truly afford based on the mortgage amount you’ll likely get approved for.
Use online calculators to estimate the maximum mortgage you may qualify for using your income, deposit savings, and credit details. Then factor in the upfront purchasing costs and post-move expenses like insurance to set a total realistic purchasing budget cap.
Conclusion
Buying your first home is a huge financial and emotional commitment filled with important decisions. By taking the time to plan and understand the true costs involved, you can set yourself up for a smoother, less stressful experience as a first-time buyer.
